AlmIn and Gloss Pvt. Ltd. Vs. Commr. of Central Excise

1. The issue in the appeal relates to duty to be charged in respect of the goods manufactured in the appellants' unit which was set up as a 100% Export Oriented Unit (EOU). The appellants had imported capital goods valued at Rs. 1,93,773/- in terms of 100% EOU scheme free of duty as envisaged in the relevant export-import policy. The appellants were found to have cleared the goods manufactured in their unit in the domestic consumption area and did not export the goods as required under the Scheme. The appellants sold the goods to Seventh day Advebtists who paid the appellants in foreign exchange for their purchase The authorities allowed provisional clearance of the goods pending final decision as to the liability to duty under domestic tariff area. Under the Scheme, goods could be cleared only against licence as items manufactured and cleared by the appellants could not be imported under OGL as per the policy. The appellants pleaded before the authorities that since the goods had been supplied against freely convertible foreign exchange the same should be treated as deemed export. The lower authority therefore in this context has held as under in paras 23 & 24 : "23. In this connection, it is worth recapitulating the basic philosophy of 100% EOU. 100% EOUs are permitted to manufacture goods for export purposes so that they not only earn foreign exchange but also make their product competitive in the international market. In order to facilitate this objective 100% EOUs are permitted to import capital and consumable goods without payment of Customs Duty and also purchase indigenous materials without payment of Central Excise Duty. Further, they are given added incentive meant for export units, tax holidays for some time and further benefits like soft loan, etc. As mentioned earlier, the whole idea being to enable such units to compete favourably in the international market. If such units were permitted indiscretly to clear the goods to the domestic tariff area, it is very obvious that other normal units engaged in manufacturing operations of such goods will be put to severe hardship. The competitive edge of normal units will be against heavy odds. With this end in view only, clearances to Domestic Tariff Area by 100% EOUs have been permitted 'With a certain amount of restrictions and conditions. Viewed in this context, it is very evident that the party M/s. Almin and Gloss Private Limited, Hosur had violated not only the provisions of the permission issued to them under the 100% EOU Scheme but also violated the provisions of the Central Excises and Salt Act and the Rules made thereunder is not paying the duty as provided thereunder. Therefore I hold that the charges levelled against the unit in the show cause notice stand proved. The party M/s. Almin and Gloss Private Limited, Hosur is liable to pay the duty as demanded in the show cause notice." 2. The learned Counsels for the appellants pleaded that under 100% EOU scheme as incorporated in the export-import policy in terms of Notification 123/81 they were supposed to manufacture the goods out of the imported raw materials which could be cleared without payment of duty and the appellants out of the raw materials procured indigeneously which could be obtained without payment of central excise duty and the goods manufactured in the unit were required to export out of India.

The learned Counsel pleaded that on account of the peculiar market conditions, they could not effect any export but they were able to obtain order for supply of the goods to project funded in foreign exchange by Seventh day Advebtists. He pleaded that the appellants machineries were allowed to be kept under bond under Section 65.

Bonding facility allowed for also reviewed for a period upto 24-11-1983. He pleaded that the officers had also visited the appellants unit and provisional permission was granted to clear the goods for 55,980.40 in the domestic tariff area. The learned Counsel pleaded that the appellants' unit could not function as EOU and therefore it could not be treated as EOU for the purpose of manufacture of the goods as 100% EOU. He pleaded that the appellants had applied for permission to obtain indigeneous goods without payment of duty but this was refused. CT 3 certificate for the purpose was not issued. He pleaded that the duty demanded as 100% EOU was not maintainable in law.

He pleaded that the appellants were granted licence by the Central Excise authorities vide their communication dated 30-10-1985 and this licence was valid until 31-10-1994. The goods in question were manufactured from 1/89 to 3/89. He pleaded that the higher duty demand in terms of Section 3 of the Central Excises Act, for the goods which had not been manufactured was not maintainable in law. He pleaded that as it is the appellants had been allowed to bond their capital under Section 65 of the Customs Act, 1962 and the appellants also could not be treated as 100% EOU and therefore their manufacture should be considered as only in the context of the goods having been manufactured in bond. He pleaded that duty if at all may be chargeable only under Section 3(3)(ii) and for that purpose therefore, duty should have been charged in terms of Section 12 of the Customs Act, 1962. As it is, he pleaded that no customs classification was done for the purpose of levy. The rate applicable for the purpose, he pleaded will be only 76% and not as held by the learned lower authority.

3. Shri Arulsamy, the learned DR for the department pleaded that the learned lower authority has rightly demanded duty in respect of the goods manufactured by the appellants holding them as 100% EOU. He pleaded that the commitment of the appellants as 100% EOU continued notwithstanding the fact that they had not been able to operate under 100% EOU scheme.

The appellants were allowed import of capital goods without payment of duty under 100% EOU scheme in terms of Notification 13/81. The goods produced by them and cleared in the domestic area therefore, had to be charged under Section 3(3) proviso. He pleaded that the appellants themselves are to blame if they have not obtained duty free goods in terms of Notification 123/81 for the purpose of manufacture of the goods in their 100% EOU.4. We have considered the pleas made by both the sides. We observe that the question to be decided is as to what would be the rate of duty chargeable in respect of the goods cleared by the appellants who had set up their unit under 100% EOU Scheme. We observe that there has been correspondence between the appellants and the excise authorities in regard to operations to be carried out in their Unit under 100% EOU.The Assistant Collector Central Excise, Hosur by his letter dated 12-4-1988 in reply to one of their letters dated 24-3-1988 has written to the appellants which reads as under : "It is seen from the records that permission was granted to you by the Department of Industrial Development No. PER : 71 (82)/E.O. No. 190(02) - II, New Delhi dated 30-12-1982, on the condition that the gestation period for achieving export target by the undertaking shall be two years, and the period of export obligation shall commence immediately thereafter.

During the gestation period, exports shall have to be atleast three fourths of the production.

In as much as you have [not] commenced your production so far, necessary renewal of permission by the Department of Industrial Development is necessary".

The appellants it is seen, had addressed a letter dated 29-4-1988 requesting for issue of a CT-3 certificate and the authorities have replied vide their letter dated 1-6-1988 as under : "As instructed in this office letter dated 12-4-1988 you should contain the renewal from the Ministry of Industry, Department of Industrial Development and send the renewal letter of this office.

On receipt of renewal letter, CT. 3 certificate will be issued to you".

The appellants at this stage could no procure the materials under the scheme without payment of duty under 100% EOU Scheme in the absence of CT-3 certificate and for the purpose of manufacture of the goods in question they had obtained duty paid materials. However, after this exchange of correspondence there is another letter dated 29-11-1988 under which the AC has allowed the appellants to manufacture the goods in question under bond under Section 65 of the Customs Act, 1962 for a period of one year from 25-11-1988 to 24-11-1989. It is relevant at this stage to refer to this section to appreciate the scope of the proviso before us. Section 65 is reproduced below for convenience of reference.: "65. Manufacture and other operations in relation to goods in a warehouse. - (1) With the sanction of the Assistant Collector of Customs and subject to such conditions and on payment of such fees as may be prescribed, the owner of any warehoused goods may carry on any manufacturing process or other operations in the warehouse in relation to such goods.

(2) Where in the course of any operations permissible in relation to any warehoused goods under Sub-section (1) there is any waste or refuse, the following provisions shall apply : (a) if the whole or any part of the goods resulting from such operations are exported, import duty shall be remitted on the quantity of the warehoused goods contained in so much of the waste or refuse as has arisen from the operations carried on in relation to the goods exported : Provided that such waste or refuse is either destroyed or duty is paid on such waste or refuse as if it had been imported into India in that form : (b) if the whole or any part of the goods resulting from such operations are cleared from the warehouse for home consumption, import duty shall be charged on the quantity of the warehoused goods contained in so much of the waste or refuse as has arisen from the operations carried on in relation to the goods cleared for home consumption." It is seen that this section provides for the owner of any warehoused goods to carry on any manufacturing process or other operations in the warehouse in relation to the warehoused goods. In the present case, what was imported was capital goods and there was no manufacturing operations to be carried out in relation to these goods. It is not understandable how the authorities have allowed the appellants to manufacture goods in terms of Section 65 when no raw material as such had been imported by the appellants and which required manufacture. The appellants admittedly had got raw material which had already suffered duty. It is seen that once the Central excise authorities took the stand that the appellants had not fulfilled the requirement of 100% EOU scheme as set out in the Section and they had not manufactured the goods in the time frame as specified under, the terms of the permission granted to them by the Ministry of Industrial Development, in the matter of manufacture of goods i.e. the pre-gestation period allowed and for that reason the appellants also requested the Central Excise authorities pending receipt of the renewal of the permission from the Ministry of Industrial Development, to receive the goods without payment of duty. The learned lower authority should have examined the whole issue in this background and determined whether the appellants continued to be a 100% EOU or that whether they did or did not fulfil the requirements for the importation of the machinery and whether the liabilities in respect of the goods manufactured could be attached to them as 100% EOU. The appellants could have been proceeded against separately for not fulfilling the conditions as a 100% EOU for demand of duty on the goods without payment of duty in terms of the said Scheme, The authorities themselves appear to have been confused as to how to treat this situation as had arisen on account of the appellants not being able to operate as a 100% EOU within the terms of the permission granted to them. It appears that they were allowed the bonding facility under Section 65 without correctly appreciating the legal scope of the said Section. In this view of the matter we hold that the learned lower authority has not examined the position in depth taking into consideration the totality of the circumstances and the correspondence exchanged between the appellants and the department as the appellants failed to function within the paramaters of the permission granted to them. We, therefore, hold that the lower authority's order is not a proper order and it has to be set aside. We, therefore, set aside the order of the ld. lower authority and remand the matter to the learned lower authority for de novo adjudication after giving the appellants an opportunity of hearing after taking into consideration, the facts on record. The appeal is thus allowed by remand. We make it clear that we are not expressing any opinion on merits.